$~5.
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ INCOME TAX APPEAL NO. 41/2013
Date of decision: 8th October, 2013
COMMISSIONER OF INCOME TAX: DELHI-I
..... Appellant
Through Mr. Abhishek Maratha, Sr. Standing
Counsel.
versus
ARCANE DEVELOPERS PVT. LTD.
..... Respondent
Through Nemo.
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE SANJEEV SACHDEVA
SANJIV KHANNA, J. (ORAL):
Revenue impugns order dated 22nd June, 2012 in this appeal,
which relates to Assessment Year 2007-08.
2. The issue raised is whether interest of Rs.1,26,64,315/- paid to
M/s Dharti Investments and Holding Limited on loan of Rs.25 crores
could be allowed as expenditure under Section 36(1)(iii) of the Income
Tax Act, 1961 (Act, for short) and Rs.2,32,582/- on account of
travel/statutory fees/audit fees etc can be allowed as expenditure under
ITA No. 41/2013 Page 1 of 7
Section 37 of the Act.
3. The Assessing Officer had disallowed the said amounts as
expenditure under Section 37/36(1)(iii) on the ground that the business
of the assessee had commenced/was set up on 5th July, 2006. Loan
from M/s Dharti Investments and Holding Limited, it is stated, was
taken on 16th May, 2006. Learned counsel relies upon judgment of this
Court dated 9th July, 2013 in ITR No. 131/2010, titled Commissioner
of Income Tax versus Samsung India Electronics Limited. Our
attention was drawn to the fact that Memorandum of Understanding
between the respondent and third parties is dated 30th May, 2006 and
not 31st March, 2006, as recorded in the impugned order.
4. The respondent-assessee is a company, which was incorporated
on 4th August, 2005. The main objects for incorporation of the
company are as under:-
"1. To carry on the business as owners
builders, colonisers, developers, promoters,
proprietors, occupiers, lessors, interior
decorators, civil contractors, maintainer of
residential, commercial and industrial
buildings, colonies, mills and factorys sheds
and buildings, workshops buildings, hospitals
& nursing homes, and to deal in all kinds of
immovable properties whether belonging to the
Company or not.
2. To undertake and carry on the business
of purchasing, selling and developing any type
of land or plot whether residential, commercial,
ITA No. 41/2013 Page 2 of 7
industrial, rural or urban that may belong to
company or to any other person of whatever
nature and, to deal in land or immovable
properties of any description or nature on
commission basis and for that purpose to make
agreements to sell the land of the company or
of any body else and to deal in building
material electrical and civil materials.
3. To erect and to construct houses,
buildings or civil and constructional works of
every description on any land of the company
or upon any other lands or immovable property
and to purchase, take on lease, or otherwise
own, hold, occupy, construct, erect, alter,
develop, colonies, decorate furnish, pull down,
improve, repair, renovate, build, plan, layout,
set, transfer, mortgage, charge assign, let out,
hire, sublet or sublease all type of lands, plots,
buildings, hereditaments, bungalows, quarters,
offices, flats, swimming pools, chawls,
warehouses, godowns, shops, stalles, markets,
hotels, and restaurants building, banquet halls,
houses, structures, construction, tenements,
roads, bridges, land, estates and immovable
properties whether freehold or lease hold of any
nature and description and where ever situated
in way and partly consideration for a gross sum
or rent or partly in one in other or any
consideration.
4. To act as an agent for purchasing, selling,
and letting on hire, land and houses whether
multi-storey, commercial land/or residential
buildings on commission basis.
5. To consolidate or subdivide, develop,
maintain, purchase, sell and letting on hire into
farms and sheds and to let out the same on
rental or license basis.
6. To acquire, purchase and for the
construction of multi-storeyed buildings and to
ITA No. 41/2013 Page 3 of 7
licence the flats therein on suitable terms and
conditions and to do the consultancy business
in the construction and allied activities."
5. In Western Indian Vegetables Products Limited versus CIT,
(1954) 26 ITR 151, Bombay High Court had examined the concept and
noticed the difference between "commencement" and "setting up" of
business and it was observed as under:-
"The important question that has got to be
considered is from which date are the expenses
of this business to be considered permissible
deductions and for that purpose the section that
we have got to look to is section 2(11) and that
section defines the ,,previous year and for the
purpose of a business the previous year begins
from the date of setting up of the business.
Therefore it is only after the business is set up
that the previous year of that business
commences and in that previous year the
expenses incurred in the business can be
claimed as permissible deductions. Any
expenses incurred prior to setting up of a
business would obviously not be permissible
deductions because those expenses would be
incurred at a point of time when the previous
years of the business would not have
commenced.
xxxxxx
It seems to us, that the expression ,,setting up
means, as is defined in the Oxford English
Dictionary, ,,to place on foot or ,,to establish,
and in contradistinction to ,,commence. The
distinction is this that when a business is
established and is ready to commence business
then it can be said of that business that it is set
ITA No. 41/2013 Page 4 of 7
up. But before it is ready to commence business
it is not set up. But there may be an
interregnum, there may be an interval between
a business which is set up and a business which
is commenced and all expenses incurred after
the setting up of the business and before the
commencement of the business, all expenses
during the interregnum, would be permissible
deductions under section 10(2)."
6. The aforesaid distinction is relevant when we examine and refer
to the definition of ,,previous year. It is well settled that "date of
setting up of business" and "date of commencement of business" may
be two separate dates.
7. In the present case, as noticed above, the respondent company
was incorporated on 4th August, 2005, i.e., in the last Assessment Year
2006-07. It had entered into a Memorandum of Understanding dated
31st May, 2006 with third parties in respect of a project near
Chandigarh, Mohali, Punjab. Subsequently, joint venture agreement
dated 5th July, 2006 was executed between the respondent and third
parties. The said factual positions are not disputed. Loan of Rs.25
crores was taken by the respondent-assessee on 16th May, 2006. We
do not think that the date of joint venture agreement, i.e., 5th July, 2006
should be and can be as a date of setting up of business. This is the
second year of operation and for the earlier year, i.e., Assessment Year
2006-07, return of income was filed on 29th November, 2006 declaring
business loss of Rs.6612/-. Date of setting up of business depends
ITA No. 41/2013 Page 5 of 7
upon facts and the nature of the business. This is the reason why we
have referred to the objects for incorporation of the company and the
main business activities in which the respondent-assessee was engaged.
The first appellate authority examined the whole issue in depth and has
pointed out that the Memorandum of Understanding required
payments. The respondent-assessee had, therefore, arranged for funds.
Memorandum of Understanding is culmination of the negotiations
started and undertaken earlier and subsequently fructified on payment
by the respondent-assessee into the joint venture agreement. Setting up
of business takes place when the business is ready and first steps are
taken. In case of real estate business, the said setting up of business
was complete when first steps were taken by the respondent-assessee
to look around and negotiate with parties. There can be a gap between
setting up and when first steps were taken by the respondent and
finalisation of the first written agreement. Business activities of the
respondent did not require construction of a factory, machinery etc.
Negotiations are required to enter into a written understanding and it is
obvious that the loan was taken for business and to proceed further and
conclude the deal. The aforesaid facts have been examined and
highlighted by the first appellate authority. The said findings of fact
have been affirmed by the tribunal. A pragmatic and a practical view
has to be taken.
ITA No. 41/2013 Page 6 of 7
8. No other contention has been raised or argued. Keeping in view
the facts founds by the first appellate authority and the tribunal, we do
not find any merit in the present appeal. In fact, decision in the case of
Samsung India Electronics Limited (supra) does not support the
appellant, but supports the findings recorded by the tribunal. The
appeal is accordingly dismissed.
SANJIV KHANNA, J.
SANJEEV SACHDEVA, J.
OCTOBER 8, 2013
VKR
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